The final rule is substantially the same as proposed in April 2018 except for one change in terminology.

Key points

The federal banking agencies have adopted, substantially as proposed, final rules allowing all banking organizations that experience a reduction in retained earnings from the adoption of CECL to elect a three-year phase-in of the “day 1” adverse impact to regulatory capital.

Banking organizations must elect to use the phase-in approach by the end of their first reporting period after adopting CECL or they forfeit the option.

Certain large banking organizations are required to report two sets of regulatory capital ratios: one with the phase-in transition amounts and one without (fully phased-in).

Company run stress tests would not reflect the adoption of CECL until the 2020 stress test cycle even if CECL is adopted earlier; the Federal Reserve, however, will not issue supervisory findings on BHCs’ CECL-related allowance estimations in the CCAR exercise until 2022.

The federal banking agencies (Federal Reserve, OCC, and FDIC) have approved a final rule amending their regulatory capital rules to respond to banking organizations’ implementation of the new Current Expected Credit Losses (CECL) accounting methodology. The final rule is substantially the same as proposed in April 2018 (see KPMG Regulatory Alert) except for one change in terminology: the final rule uses a new term, “adjusted allowance for credit losses” (AACL) to replace the proposed term “allowance for credit losses” (ACL). The final rule is effective April 1, 2019, though organizations that choose to adopt CECL early may elect to adopt this rule in the first quarter of 2019.

Additional points

Stress Tests. Banking organizations that adopt CECL are required to begin using the provision for credit losses in the 2020 stress test cycle even if they adopted CECL in 2018 or 2019. For the 2018 and 2019 stress test cycles, a banking organization would continue to use its provision for loan and lease losses, even if it adopted CECL in 2019. Banking organizations that adopt CECL in 2021 would not be required to use the provision for credit losses until the 2021 stress test cycle.

The Federal Reserve separately released a statement clarifying that it will not incorporate CECL into its supervisory stress testing framework (Comprehensive Capital Analysis and Review, or CCAR) until the 2022 cycle, and further will not issue supervisory findings on firms’ stressed estimation of allowance under CECL in the CCAR qualitative assessment until 2022 even though firms will be required to incorporate CECL in company-run stress tests beginning in 2020.

CECL Accounting Standard. The CECL methodology was issued in 2016 as part of Accounting Standards Update No. 2016-13. The effective date varies for different banking organizations based on certain characteristics; it becomes effective for the first group of banking organizations in their first fiscal year beginning after December 15, 2019, including interim periods within that fiscal year (e.g., quarterly reports). Early adoption is permitted for all banking organizations for fiscal years beginning after December 15, 2018.

The federal banking agencies acknowledge commenters’ concerns about the impact of CECL on regulatory capital and state they “are committed to closely monitoring the effects of CECL on regulatory capital and bank lending practices.” Separately, the potential impact of CECL on financial services firms was the subject of a December 2018 hearing in the House of Representatives as well as a discussion item at the Financial Stability Oversight Council’s December meeting.